Question

A stock current sells for $10.00. It is paying an annual dividend of $0.50 and is expected to double in price over the next five years. You require an annual return of 10%. Would you buy the stock? Why or why not? (show your calculations)

Answer 1

Calculate the return you would get after 5 years:

Using financial calculator BA II Plus - Input details:	#
FV = Future value of stock will double = $-10 x 2 =	-$20.00
PV = Present Value =	$10.00
N = Number of years =	5
PMT = Payment of dividend =	-$0.50
CPT > I/Y = Rate = Average annual return =	18.7678
Avg. Annual return on stock in %	18.7678%

As expected return is 10% and you will earn average return of 18.7678% hence it is a buy decision.

You should buy the stock.